Madagascar: The Hottest Energy Play in East Africa

Madagascar's been sitting on some 20 billion barrels in oil reserves for quite a while. Investors have only recently shown interest, though. Extraction is technologically challenging, and no one was quite sure about commercial viability. But the wait is over. The oil will begin to flow-soon.

Expect to see a rush on Madagascar, as all eyes are turned on East Africa's natural resources.

The good news comes from UK-listed Madagascar Oil, which announced this week that it expects production to begin early next year and hopes to extract 3.9 billion barrels of heavy crude from sands. The country hopes to start exporting oil by 2020.

Madagascar Oil (LON: MOIL) should see its 28-well steam flood pilot project at its major Tsimiroro onshore field operational in three months. The field has an estimated 1.7 billion barrels of oil-in-place-an estimate that could increase with further work in the field.

Madagascar Oil is also working another field-Bemolanga-with partner Total (France). 

According to the company, "Tsimiroro and Bemolanga, have been shown to have multi-billion barrel resource volumes in place. Recent field tests and studies suggest that a large portion of the Company's Tsimiroro heavy oil assets have excellent potential for economic development."

But this is only scratching the surface of Madagascar's potential.

Madagascar has 225 offshore exploration blocks, plus a number of onshore blocks with three key onshore basins: Ambilobe, Majunga and Morondava. The largest Bemolanga and Tsimiroro fields are in the Morondova basin. Most of this is unexplored.

Upstream, while Tisimiroro holds around 1.7-2 billion barrels oil-in-place, with potential for light oil and natural gas, Bemolanga is an ultra-heavy field with potential resources of 16.6 billion barrels (about 9.8 billion barrels of recoverable reserves).

Why has Madagascar been so complicated? Well, for starters, extraction is not easy. Madagascar Oil has had to use a process that requires steam to heat the oil and change its viscosity in order for it to be extracted.

Infrastructure is also a challenge. Madagascar has no refineries-yet. When Madagascar Oil starts production, it will need an export terminal, a pipeline, a marine terminal and an offshore mooring facility.

The UK-listed company initially estimated the cost of fully developing the field at around $1.5 billion-the bulk of that for the above-mentioned infrastructure. It's now hoping that the pilot project will help them to refine that estimate, and of course lower it. 

For now, the company is estimating that it will need around five years to get a solid start on this infrastructure development. They are eyeing 2019 for a start date.

Things have gotten off to a slow start. A bit of a sticking point for investors has been political stability: The country underwent a coup in 2009. The transition of authority that followed threatened to expropriate major oil fields, unsettling investors. That hasn't happened, and elections next year will be decisive. So investors are proceeding with caution.

There have been some promising developments, though, that should ease investor concerns. In September last year, authorities signed a road-map for ending the political crisis and a vigorous mining sector has continued to boost economic growth. Despite this road-map, however, negotiations continue, and parliamentary elections that were supposed to be held this year, have been moved to next year. There is still a risk of violence and even civil war.

For now, it's about technology first, infrastructure second. But we're optimistic about the new technology, which injects steam into the ground to soften the oil. While commercial exploitation is still probably more than five years away, we suggest not waiting that long to get in on this one. East Africa is hot-Madagascar is on fire.

So far, aside from Madagascar Oil, other companies involved in exploration include: Total, Candax energy, Afren, Tullow, Exxon Mobil, Essar, Niko, Sterling, Gippsland. We expect to see more hit this scene very soon.

By. Oilprice.com Analysts